How To Start a Cosmetic Business
If you're thinking about starting up a cosmetic business, you probably have a lot of questions. How do I get started in the cosmetics industry? What do I need to know about the different types of business structures? Are there any legal requirements for starting a makeup business?
Whether you are still brainstorming or already have your business plan and supplies, it helps to have an overview of the steps in forming a cosmetics business.
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Structure of a Cosmetic Business
For small business owners and entrepreneurs starting their first business, the idea of forming a business entity may seem intimidating.
However, there are simple steps that you can take to get your legal entity up and running once you decide on the structure that's best for you.
Sole Proprietorship Pros
A sole proprietorship is the easiest and cheapest business structure to form. You do not have to file paperwork with any state or local agencies unless you register a business name.
As a sole proprietor, your personal name would be your business name. You may conduct business under your legal name.
"Doing Business As" Business Name
If you want to use a different name for your business, you need to do a DBA ("doing business as") filing. A DBA filing would allow you to register and use your assumed name.
For example, Jane Smith can do business as "Jane Smith" without registering her name as a DBA name. However, if Jane Smith wished to do business as "Jane's Nail Solutions," she would need to file the fictitious business name with the Secretary of State or the appropriate local agency.
Sole Proprietorship Cons
There is a downside to forming a sole proprietorship. In a sole proprietorship, personal assets and business assets are all the same. This could be important if the business has a debt or obligation and someone files a lawsuit against the company.
It could also matter in the case of bankruptcy. With a sole proprietorship, you could lose your personal assets in a judgment against you. This means that your house, cars, and bank accounts could be at risk if you form a sole proprietorship.
A limited liability company is a type of business structure that gives owners limited liability. You may wish to consider forming a limited liability company (LLC) instead of a sole proprietorship so that your personal assets are protected.
Limited Liability Companies
In a limited liability company, owners do not have personal liability for business debts. Because of this liability protection, someone who sues the business can't reach an LLC owner's personal assets.
However, there are more requirements to form an LLC than there are to create a sole proprietorship. To form an LLC, you will need to file Articles of Organization with the Secretary of State and pay the filing fee. You will also need an operating agreement.
An LLC operating agreement covers the rights and responsibilities of the members of the organization. Before you make an operating agreement, you may want to consider who will be an owner of the LLC and what ownership interest they may have. In most states, you do not have to file an operating agreement with any agency.
Corporations are complex legal entities. The owners of a corporation are called shareholders. Shareholders do not manage a corporation. Instead, there are officers and a board of directors to manage the day-to-day operations. Shareholders, officers, and directors are all part of the corporate structure.
Generally, it is more expensive to form a corporation than it is to create other business entities. However, having limited liability is a benefit of corporations. Also, corporations can issue shares of stock. If you're interested in going public and attracting investors, you may want to form a corporation.
Steps To Open a New Cosmetic Business
Once you've considered the types of business structures, you may be ready to move on to the steps in forming your new cosmetic business.
The following are common steps in the process:
- Create a business plan.
- Decide on a name for your business.
- Apply for an Employer Identification Number (EIN).
- File documents with the Secretary of State or county (for an LLC or corporation).
When you start considering names, you should search to ensure that the name you want is not already in use. Applying for your EIN is a process you can complete through the IRS (Internal Revenue Service).
Filing Taxes for Your Cosmetic Business
The way that the IRS treats your cosmetic business for tax purposes depends on many factors. One of the most important of these factors is the type of business structure that you choose.
A sole proprietor reports business income on their personal tax return. LLC owners also have what is called "pass-through" taxation. However, an LLC owner can choose to be taxed as an S-corp or C-corp.
An S-corporation is a tax status, not a business entity. If you choose to be taxed as an S-corporation and fill out the appropriate forms, you may save on employment tax.
A corporation is taxed at the corporate rate. Some earnings are also distributed to owners and taxed. This creates what some call "double taxation."
Determining Products and Services
Putting together a business plan will help you estimate the expenses that you can expect as you start up your new business.
Consider your customer base and their needs. You should carefully decide on makeup products and kinds of ingredients, colors to offer, the specific "look" and feel you will provide, and the cosmetic costs compared to what you charge for services. You'll also want to consider the latest market trends, such as organic makeup.
Filling a need in the local area provides a target market for potential customers and should be part of your overall marketing strategy.
You might be wondering if the Food and Drug Administration (FDA) regulations apply to cosmetic businesses. The answer is yes.
Whether you run your cosmetic company out of your home or use a facility, you are responsible for the safety of your skincare products. You are also responsible for properly labeling your products.
Considering Starting Up a New Cosmetic Business?
We take the guesswork out of forming your business. Consider using our trusted, simple-to-use online business formation tool. We'll walk you through the steps of creating your business and help you meet all the legal requirements.
You may have questions about your situation, or you may want advice on the best business entity for you. If you're thinking about entering the cosmetics industry, don't hesitate to reach out to a business and commercial lawyer for your business needs.
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